A Tale of Two Regulators: What DOL Can Teach the SEC

The Department of Labor’s rationale for rewriting its fiduciary standards was captured by Fi360’s Kristina Fausti, writing in her July 2011 report to the American Bar Association: “Interestingly, while most regulatory initiatives are initiated as the result of policymakers observing trends in the market, in the case of the DOL’s fiduciary definition proposal, investigators and enforcement staff found the definition of fiduciary to be unworkable in trying to prevent and sanction misconduct by advisors whom plans and participants often view as acting in a fiduciary capacity. Therefore, investigators approached policymakers seeking a solution to make it simpler to determine the fiduciary status of advisors in order to reduce conflicts and promote greater transparency and accountability.”

Contrast the DOL’s consumer-oriented approach to improving its rules with the SEC’s behavior over considering the Dodd-Frank-mandated fiduciary standard for brokers, in which “additional costs,” a “level playing field,” and “business model neutrality” have been the primary considerations. We might also compare the DOL’s intended course of action in the face of unprecedented opposition: “The DOL, however,” wrote Fausti, “will likely move forward with its proposal to replace the decades old five-part test in order to give its investigators the tools they need to protect plans and participants.” No foot dragging, no series of study after study, no plausibly ignorable reports by its staff; the DOL simply identified a problem through its investigators last November, and swiftly proceeded to draft a solution. If it’s too consumer oriented for the financial industry, well, that’s not whom the DOL is charged with protecting. 

As the independent advisory profession moves toward its own SRO to ensure the consumer-oriented regulation of its fiduciary standard, the DOL appears to be a far better model than either the SEC or FINRA. But perhaps advisors should take one page out of the securities industry’s book, and point out how the FINRA regulation of RIAs will raise costs, limit investor choice, and limit investor access to independent, fiduciary investment advice. After all, large brokerage firms are able to absorb the costs of complying with FINRA’s bureaucratic, rules-based standards thanks to their other (often conflicting) business lines such as principle trading or proprietary products. Independent, fiduciary investment advisors, however, are restricted from such highly profitable side businesses, due to the inherent conflicts with the best interests of the clients. That’s an argument worthy of the DOL.